Will Estee Lauder Stock Rebound To Its Pre-Inflation Shock Highs?

Estee Lauder stock (NYSE: EL) currently trades at $140 per share, 52% below the level seen in March 2021, and it appears undervalued. EL stock was trading at around $255 in early June 2022, just before the Fed started increasing rates, and is now 45% below that level, compared to 16% gains for the S&P 500 during this period. This underperformance of EL stock can be attributed to slowing sales growth, partly due to a slower recovery in Asia travel. Its profitability has also been adversely impacted in the recent past due to increased input costs and higher marketing spending, among other factors.

Looking at a slightly longer term, EL stock has suffered a sharp decline of 45% from levels of $265 in early January 2021 to around $140 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the decrease in EL stock has been far from consistent. Returns for the stock were 39% in 2021, -33% in 2022, and -44% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 13% in 2023 (YTD) – indicating an underperformance for the ticker in 2022 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could EL face a similar situation as it did in 2022 and 2023 and lose value over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level of over $372 means that EL stock will have to gain more than 150% from here, and we don’t think this will materialize anytime soon. That said, EL stock looks undervalued at its current price of $140. We estimate Estee Lauder’s valuation to be around $236 per share, over 65% above its current market price.

Our detailed analysis of Estee Lauder’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains on the cards.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Estee Lauder and S&P 500 Performance During 2007-08 Crisis

EL stock declined from nearly $11 in September 2007 to $6 in March 2009 (as the markets bottomed out), implying it lost nearly 47% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $12 in early 2010, rising 113% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Estee Lauder’s Fundamentals Over Recent Years

Estee Lauder’s revenue increased from $14.3 billion in fiscal 2020 (fiscal ends in June) to $15.9 billion in fiscal 2023, partly due to a travel recovery and opening up of economies. However, the sales growth has slowed in recent quarters due to a weakening consumer spending environment and slower than anticipated pick up in Asia demand, resulting in a 10% y-o-y decline in fiscal 2023 sales. Estee Lauder’s operating margin contracted from 16% in 2019 to 10% in 2023. Our Estee Laude Operating Income Comparison dashboard has more details. The company’s earnings stood at $2.81 on a per-share and reported basis in 2023, compared to the $1.90 figure in 2020.

Does Estee Lauder Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Estee Lauder’s total debt increased from $6.1 billion in 2020 to $8.1 billion in 2023, while its cash decreased from around $5.0 billion to $4.0 billion over the same period. The company also garnered $1.7 billion in cash flows from operations in 2023. Given its cash cushion, Estee Lauder appears to be in a good position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Estee Lauder stock has the potential for strong gains once fears of a potential recession are allayed. That said, unfavorable macroeconomic factors, weak consumer demand, and a slower recovery in Asia are potential risk factors for realizing these gains.

While EL stock appears undervalued, it is helpful to see how Estee Lauder’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 10/12/2023
[2] Cumulative total returns since the end of 2016